The Brunner Test and "Undue Hardship"

Many work tirelessly over the years, but never quite make enough to pay back the large amounts they barrow for their education, and many owe even more when their loan amounts grow even higher when they go to in default.

Many file for bankruptcy, wiping out other debts. But getting rid of student loans requires initiating an entirely separate legal process, where debtors must prove that paying the debt would cause an “undue hardship.”

A case captured the attention of judges and legal scholars when a judge’s bluntly written opinion rebuked the widely adopted hardship standard used to determine whether a debtor is worthy of a discharge.

The judge, Jim D. Pappas, in his written opinion for the bankruptcy appellate panel decision in the United States Court of Appeals for the Ninth Circuit, said the analysis used “to determine the existence of an undue hardship is too narrow, no longer reflects reality and should be revised.”

He added: “It would seem that in this new, different environment, in determining whether repayment of a student loan constitutes an undue hardship, a bankruptcy court should be afforded flexibility to consider all relevant facts about the debtor and the subject loans.” But the current standard, he wrote, “does not allow it.”

Although plenty of cases still resemble a strict interpretation of this standard, some judges and courts have let it be known in recent years that they believe the strict standard — known as the Brunner test — should be questioned, even if they are still legally bound to it now.

Because the bankruptcy code never defined “undue hardship,” the courts began developing their own definitions. Many courts adopted the Brunner test, which began from a ruling in 1987, when a woman named Marie Brunner filed for a discharge of her student loan no less than a year after she completed a master’s degree.

In an effort to stop barrowers from trying to cancel their debts prematurely, the case laid out a three-tiered test: Individuals must prove they made a good-faith effort to pay the loan by finding work and minimizing their expenses. Barrowers must show they cannot maintain a standard of living based on their income and expenses if they had to repay the loan.

But then, what is probably the most challening question, the court must consider whether that situation is likely to remain for a substantial part of the repayment process — which in effect, requires the judge to determine the debtor’s future, ensuring what some courts have described as a “certainty of hopelessness.”

Bankruptcy scholars and judges say the Brunner test made sense during the period it was conceived because even if barrowers could not pass the Brunner test, their loans, would automatically be discharged in bankruptcy 5 years after their repayment period started.

In 2015, the legal landscape has drastically changed. Before 1977, student loans were discharged in bankruptcy just like other loans and credit card debts. Congress cracked down on the law in 1976, adding the five-year period, and once again in 1990, when a waiting period was extended to 7 years.

However in 1998, this waiting period was. So now, all barrowers must prove undue hardship to discharge student loan debts. (In 2005, Congress added private student loans as well to a mix of federal education debts that may not be discharged, even though these loans are not backed by the federal government.)

Another case case that gained national attention, involved a “destitute” paralegal by the name of Susan Krieger. According to court documents. Ms. Krieger earned a bachelor’s degree in legal studies. But after looking for a decade, she couldn’t find a job.

The Educational Credit Management Corporation, the agency brought on to battle those trying to escape from the burden of loan repayment in court, argued that Ms. Krieger should enroll in an repayment program. Ms. Krieger’s remaining balance of about $25,000 was discharged eventually.

However, it was the written opinion a reputable judge questioning the application of the Brunner test, that has been routinely cited by other judges. In the ruling, Frank H. Easterbrook, then chief judge for the United States Court of Appeals for the Seventh Circuit, signaled that requiring barrowers to prove their remaining future was “hopeless” and was taking the undue hardship standard too far.

He wrote that it was important not to allow “judicial glosses,” like the language in the Brunner case, “to supersede the statute itself.”

Rafael I. Pardo, a bankruptcy law professor stated that Judge Easterbrook’s opinion was a reminder to other courts that carried a lot of weight. “If this highly respected, highly cerebral conservative judge is saying this, that is a big deal,” he added. “It is a clarion call that some judges should be more forgiving when applying the law.”

Judge Easterbrook and Judge Pappas were not the first judges to harshly criticize the Brunner test standard. Judge James B. Haines Jr., who served 25 years as federal bankruptcy judge wrote in an opinion in 2000, that some courts reach too far in trying to define undue hardship.

He stated that he never felt constrained by the Brunner test because the higher court in his jurisdiction never used that standard, giving him the freedom to consider another standard, whereas judges can consider the “totality of the circumstances.”

“Throughout my time on the bench, I heard many student loan cases,” said Judge Haines, now a professor at Maine University School of Law. “The totality of the circumstances test gave me sufficient structure, with a fair ability to balance all pertinent facts.”

A lot of the facts going into the hardships of those escaping student debt have become more dire over the past 10 years. Among debtors filing for bankruptcy with student loans, the average amount of student loan debt has doubled to just about $31,000 in 2014 from $15,350 in 2005. But even more importantly, student loans as a percentage of the tax filer’s annual gross income have also increased dramatically. In 2014, 16 percent of all bankruptcy filers had student loans that totaled more than 50 percent of their annual income, compared with 5.4 percent in 2005.

This year, President Obama instructed several governmental agencies to review, by Oct. 1, whether the treatment of student loans in bankruptcy should be altered. Congress could tweak the bankruptcy code, perhaps reinstating a waiting period before debts can be canceled. Judge Kaplan, in New Jersey, said perhaps 10 or 15 years was the right number. Otherwise, the existing hardship standard could be overridden if a circuit court hears a case en banc, meaning all of the judges in a circuit decide together.

All of those are long shots, at least for the time being. A larger part of the problem is that only a small percentage of borrowers attempt to discharge their student loans in bankruptcy, perhaps because of the perception that it isn’t feasible.

But debtors’ best chance at having their student loans wiped away may simply be to try.

With over 12 years of experience and thousands of cases as a consumer bankruptcy attorney, Chris Bush is on the cutting edge of Bankruptcy and Student Loan Law. Chris can assist you in untangling the options to find the best solution for your specific debt relief case.